National Health Investors’ (NYSE: NHI) rent deferrals and concessions continued in the first quarter of 2021 and could continue to have an effect on the company’s bottom line in the second quarter, and possibly longer.
But, operators working with the Murfreesboro, Tennessee-based real estate investment trust (REIT) are seeing positive momentum on move-ins and occupancy, particularly with needs-based care and entrance fee properties. Even Bickford Senior Living, a recipient of $9.6 million in deferred rent from the beginning of 2020 through the end of Q1 2021, reported a slight occupancy gain in April.
Freestanding independent living and assisted living facilities lagged behind in performance, however, and the REIT is in negotiations with IL giant Holiday Retirement on rent concessions that could take effect in the second quarter of 2021.
NHI took some measures to alleviate that pressure in the quarter. It struck a deal to sell Bickford six previously leased communities for $52.9 million, which should help Bickford repay its deferred rent to NHI, if positive occupancy momentum continues.
More dispositions are being considered on a case-by-case basis throughout the remainder of the year across NHI’s total blended portfolio, CEO Eric Mendelsohn said Tuesday during the company’s Q1 2021 earnings call. The deal volume ranges between $250 million and $400 million.
Coupled with efforts to improve its liquidity and debt maturities, this places NHI in good position for an eventual rebound, while protecting its credit rating.
“The market is in a forgiving mood for companies that are taking their medicine and right sizing portfolios, to come out the other end with healthier metrics on lease coverage and stable [net operating income],” he said.
NHI reported funds from operations (FFO) of $1.24 per share in the first quarter of 2021, a 12 cent decrease over the same period in 2020. The REIT also reported $80.89 million in revenues in the quarter, a 2.6% decrease year over year, but better than analysts’ consensus.
Rent concession concerns
NHI’s earnings “reflect the substantial pressure the company’s tenants are experiencing in the wake of the pandemic’s peak, as fallen occupancies have impaired the ability of operators to pay rent,” said Jordan Sadler, equity research analyst at KeyBanc Capital Markets, in a note to investors.
The REIT collected 94.3% of cash rents due in the first quarter of 2021, and 84.7% of rent due in April.
Bickford Senior Living, which now operates 42 communities for NHI and represents 15% of annualized cash revenue, epitomizes analysts’ concerns. The provider accounted for 4.6% of the deferred rent in Q1, and 11% in April. The deferred rent carries an 8% interest rate and is expected to be repaid over an 18-month span, beginning October 1, 2021.
The six-property sale, which included a $13 million second mortgage provided by NHI, was made with the goal of improving the position of Bickford’s remaining portfolio under NHI’s ownership, Chief Investment Officer Kevin Pascoe said.
The transaction is expected to improve the Olathe, Kansas-based operator’s annual cash flow by approximately $1.8 million, and improve NHI’s earnings before interest, taxes, depreciation, amortization, rent, and management fees (EBITDARM) coverage with the operator from 0.9x to 1.02x as of Q4 2021.
Bickford’s occupancy struggled in the quarter, falling 410 basis points to 74.5%. With vaccine clinics completed, however, April occupancy improved 180 basis points to end the month at 76.3%.
Moving forward, NHI is considering more options to put Bickford in a better position to succeed, including further dispositions.
“If we can improve cash flows that our operators are achieving from the remaining portfolios, then we can potentially accelerate the repayment of those deferrals,” CFO John Spaid said.
NHI indicated more rent concessions are likely with four other tenants, totaling $2.3 million or 3.1% of rental income, BMO Capital Markets Analysts John Kim and Juan Sanabria wrote in a note to investors.
Possible Holiday deferrals
NHI reported mixed results between its other two major operators, Senior Living Communities and Holiday Retirement.
Senior Living Communities, which primarily operates continuing care retirement communities (CCRCs) and accounts for 16% of NHI’s annual cash revenues, saw its occupancy improve from 76.2% in the fourth quarter of 2020 to 77.8% at the end of Q1 2021. Entrance fee sales showed promise, with collections in the quarter and in April exceeding 2020 numbers.
NHI’s independent living cohort, meanwhile, is not seeing the improvements of its needs-based and CCRC segments. Notably, Holiday Retirement, representing 11% of annualized cash revenue with 26 communities, had an average occupancy of 74.1% in the first quarter — a 310 basis point decrease, sequentially.
But the Winter Park, Florida-based operator’s occupancy rate held static for the past three months, which Pascoe attributes to its decision to build its own vaccine network after independent living was left out of the Pharmacy Partnership for Long-Term Care Program, which only prioritized nursing homes and assisted living communities for vaccine distribution.
Given Holiday’s occupancy trends, it is in negotiations with NHI on rent concessions which could impact performance in the second quarter and beyond. The operator used its $5 million credit enhancement that was part of its 2018 lease restructuring with NHI, which also included a $10.8 million security deposit. This deposit has not been touched at this point, but could be used as part of any agreement the two sides may reach.
Discussions on concessions are ongoing, and Mendelsohn expressed confidence that a mutually beneficial resolution can be reached, as applying the security deposit to cover deferred rent would only be a temporary respite.
“We’re not excited about the idea of using the security deposit,” he said.
NHI stock ended trading Tuesday down more than 2%, closing at $68.92 per share.
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